Why Netflix Looks Like a Short

After struggling for most of 2016, Netflix, Inc. (NFLX) recently crossed the $100 mark again as acquisition rumors lift the stock higher. It was reported that Walt Disney Co (DIS) might be interested in buying Netflix.

According to reports, Disney also had Twitter Inc (TWTR) in its cross-hair, but that deal looks very unlikely as of now.

While Netflix is currently trading at $106, I think investors shouldn’t get caught up in the acquisition rumors and should short the stock after the recent rally.

Acquisition chances are slim

Disney’s media business weakening with ESPN losing subscribers, but a potential Netflix acquisition may not be the best way out for Disney.

Users are shifting towards other platforms like Netflix and ESPN may continue losing customers going forward.

Image by / c1.staticflickr.com

While buying Netflix would help Disney curb the customer loss, a deal would not be worth it due to Netflix’s valuation.

Netflix is currently trading at 330 times trailing earnings and is valued at over $45 billion. Even acquiring Twitter would have been difficult for Disney, which is currently valued at just over $14 billion. Disney currently has only $5.2 billion in cash with a total debt of $20.4 billion.

Given that Netflix is currently valued at $45 billion and that the company will demand a premium, a deal doesn’t make sense for Disney. The company will have to take on a debt of roughly $40 billion to acquire Netflix, which I don’t think will be worth it in the long run.

Disney can easily acquire one of the competitors of Netflix for cheaper and improve their platform for lesser money than buying Netflix. Hence, I don’t see Disney making an offer for Netflix, especially at current levels.

Netflix may have rallied strongly on the acquisition rumors, but I think investors can benefit from the rally by betting against the stock.

Look for Netflix to fall as acquisition talks cool

Despite Netflix’s valuation, the stock has rallied strongly over the last few days on the back of acquisition rumors. Disney is the most likely acquirer, however, due to the reasons mentioned above, I don’t think Disney will be looking to buy Netflix.

The company simply doesn’t have enough cash to buy Netflix. Moreover, considering the interest on the debt and Netflix’s overvaluation, the deal will be very expensive for Disney in the long-run.

Hence, I don’t think Disney will be buying Netflix anytime soon and investors should probably short Netflix or buy put options to capitalize on the recent irrational exuberance.